The following chart shows the FDICís most significant management and performance challenges as identified by the Office of Inspector General (OIG):

No.

Challenge

Brief Description

1

Corporate Governance in Insured Depository Institutions

Corporate governance is generally defined as the fulfillment of the broad stewardship responsibilities entrusted to the board of directors, officers, and external and internal auditors of a corporation. A number of well-publicized announcements of business and accountability failings, including those of financial institutions, have raised questions about the credibility of management oversight and accounting practices in the United States. In certain cases, board members and senior management engaged in highrisk activities without proper risk-management processes, did not maintain adequate loan policies and procedures, and circumvented or disregarded various laws and banking regulations. In an increasingly consolidated financial industry, effective corporate governance is needed to ensure adequate stress testing and risk-management processes covering the entire organization. Adequate corporate governance protects the depositor, institution, nationís financial system, and FDIC in its role as deposit insurer. A lapse in corporate governance can lead to a rapid decline in public confidence, with potentially disastrous results to the institution. The FDICís efforts in achieving sound corporate governance without undue regulatory burden remain a management challenge.

2

Management and Analysis of Risks to the Insurance Funds

A primary goal of the FDIC under its insurance program is to ensure that its deposit insurance funds do not require augmentation by the U.S. Treasury. Achieving this goal is a considerable challenge that requires effective communication and coordination with the other federal banking agencies. The FDIC engages in an ongoing process of proactively identifying risks to the deposit insurance funds and adjusting the risk-based deposit insurance premiums charged to the institutions. The consolidations that have occurred among banks, securities firms, insurance companies, and other financial services providers resulting from the Gramm-Leach-Bliley Act (GLBA) pose additional risks to the FDICís insurance funds. Large banks may pose greater risks to the insurance funds as a result of the Basel II capital accord, which aims to align capital reserves more closely with the risks faced by banks and thrifts operating internationally. Basel II can result in reduced capital requirements at large institutions and increase competitive pressure on smaller institutions. Basel II will have far-reaching effects on the management and supervision of the largest, most complex banking organizations in the world. The United States has an important role in Basel II implementation because it supervises more bank assets than the other accord participants.

3

Security Management

The FDIC relies heavily upon automated information systems to collect, process, and store vast amounts of banking information. This information is used by financial regulators, academia, and the public to assess market and institution conditions, develop regulatory policy, and conduct research and analysis on important banking issues. Ensuring the confidentiality, integrity, and availability of this information in an environment of increasingly sophisticated security threats requires a strong, enterprise-wide information security program at the FDIC and insured depository institutions. Additional security-related threats include those focusing on disrupting the economic security of our nation. The FDIC and insured depository institutions need to ensure that sound disaster recovery and business continuity planning is present to safeguard depositors, investors, and others who depend on the financial services.

4

Money Laundering and Terrorist Financing

The nation faces a new and changing threat unlike any we have faced beforeóthe global threat of terrorism. In response to this threat, the Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (USA PATRIOT Act), which expands the Treasury Departmentís authority initially established under the Bank Secrecy Act of 1970 (BSA) to regulate the activities of U.S. financial institutions, particularly their relations with individuals and entities with foreign ties. Specifically, the USA PATRIOT Act expands the BSA beyond its original purpose of deterring and detecting money laundering to also address terrorist financing activities. In todayís global banking environment, where funds are transferred instantly and communication systems make services available internationally, a lapse at even a small financial institution outside of a major metropolitan area can have significant implications across the nation. The reality today is that all institutions are at risk of being used to facilitate criminal activities, including terrorist financing.

5

Protection of Consumersí Interests

In addition to its mission of maintaining public confidence in the nationís financial system, the FDIC also serves as an advocate for consumers through its oversight of a variety of statutory and regulatory requirements aimed at protecting consumers from unfair and unscrupulous banking practices. The FDIC is legislatively mandated to enforce various statutes and regulations regarding consumer protection and civil rights with respect to state-chartered, non-member banks and to encourage community investment initiatives by these institutions. Ensuring the protection of consumer interests is a major challenge in an environment of increasingly large financial institutions that lack the historic geographic boundaries or operations and offer an increasing array of consumer products. One key concern is identity protection. It is essential that customer information is safeguarded in order to maintain confidence in our nationís financial system.

6

Corporate Governance in the FDIC

Corporate governance within the FDIC is the responsibility of the Board of Directors, officers, and operating managers in fulfilling the Corporationís broad mission functions. It also provides the structure for setting goals and objectives, the means to attaining those goals and objectives, and ways of monitoring performance. Management of the FDICís corporate resources is essential for efficiently achieving the FDICís program goals and objectives. In the spirit of the Presidentís Management Agenda, the FDIC is undertaking a number of initiatives to improve operational efficiency and effectiveness, including major new procurement initiatives related to information technology, numerous new projects to field state-of-the-art information systems, and increasing security requirements to protect FDIC personnel and resources. Along with the recent announcements concerning corporate downsizing, effective corporate governance is a significant challenge.

7

Resolution and Receivership Activities

One of the FDICís responsibilities is planning and efficiently handling the franchise marketing of failing FDIC-insured institutions and providing prompt, responsive, and efficient resolution of failed financial institutions. These activities maintain confidence and stability in our financial system. Functions related to pre-closing, closing, and post-closing of failed financial institutions are accompanied by significant challenges to ensure the least-costly strategies are used to achieve the FDICís mission.

This Annual Report was produced by talented and dedicated staff. To these individuals, we would like to offer our sincere thanks and appreciation. Special recognition is given to the following individuals for their contributions: